Goldman Shareholder Revolts With Lawsuit

Just yesterday, I questioned whether some charity initiatives should be approved by shareholders before corporations give their resources away. Today, we learn that one of Goldman Sachs' shareholders is suing the bank so to recoup $500 million in charitable donations. The shareholder is also miffed about Goldman bankers' astronomical compensation, another issue brought up separately a few months back. This is significant and a sensible reason for a shareholder to sue, under the circumstances.

First, here's the news blurb, via Reuters:

A shareholder sued Goldman Sachs Group Inc's (GS.N) board for excessive bonuses and wants bank executives to pay the $500 million in charitable donations that Goldman is making after being criticized for its compensation policy.

Goldman Sachs bonuses substantially exceed what competitors pay "even though, on a risk-adjusted basis, Goldman's officers and managers have performed over the past several years in a manner that is, at best, only average," the lawsuit says.

All true. Shareholders are right to be annoyed that more of the bonus pool isn't being held back for long-term risk mitigation. Goldman did recently alter its bonus pool strategy slightly to defer more compensation and allow clawbacks. But that only applied to its top 30 bankers, who obviously only make up a fraction of the entire bonus pool. Given that, I think the shareholder's compensation objection holds up.

I think there's an important point being made here about the charity. The reason why Goldman's management decided to donate that $500 million was hardly out of the kindness of their hearts. They did it to quiet Americans yelling about the size of the bank's bonus pool. If those earnings had instead been retained as capital cushion, plowed into future growth or doled out to shareholders, I don't think you'd see the same populist outrage.

But that's not what happened. So essentially, that $500 million was also a kind of compensation -- a cost necessary in Management's eyes to pay out giant bonuses. I can understand why this shareholder is not amused.

I'm happy to see more shareholder interest in bank practices following the crisis. Their acquiescence to management's poor decisions prior to the crisis was part of the problem. More activist shareholders should make for more responsible management. They are supposed to answer to shareholders, but if shareholders remain silent, then there's no check on their actions other than often flaccid regulation. I can only hope that shareholders taking a more active interest in the firms they own turns out to be a lasting consequence of the crisis.

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation.
More

Indiviglio has also written for Forbes. Prior to becoming a
journalist, he spent several years working as an investment banker and a
consultant.